Retailers’ Holiday Strategy Doesn’t Have to Be “Discount Everything”

The final numbers are in for the 2016 Black Friday weekend, and the results appear strong. But there’s a surprising insight in the data released by the National Retail Federation: 36% of shoppers reported that all of their purchases were on sale; 11% made that claim in 2015. Analysts attribute this more than 300% increase to widespread discounting by retailers.

I see a confluence of events behind this deflationary holiday season. While customers used to count on Black Friday for the lowest prices of the season, in recent years retailers have been advertising ”best deal” sales regularly throughout November and December. As a result, customers have been conditioned to expect discounts. In addition to satisfying consumers’ discount desires, retailers have their own agenda to further lower prices. The tug-of-war continues between brick-and-mortar stores and online shopping, and both sides are slashing prices to sway customers (indeed, it seems that online sales may have won the Black Friday–Cyber Monday battle this year). And finally, with customers allocating more money for holiday purchases, retailers are cutting prices in the hopes that people will spend more.

Retailers should know that there are alternatives to engaging in price-to-price combat. Here are four margin-preserving price strategies that can be used to entice consumers to purchase now.

Provide a Price Guarantee

With roughly two months of holiday discounting, it’s confusing to know exactly when to buy. Should it be in early November (when discounts may entice consumers to purchase early), Black Friday/Cyber Monday (historically low prices), a few weeks into December (stores may further discount to generate incremental sales), or right after the holidays (clearance sales)? Often, it isn’t price itself that holds a customer back — it’s a fear of purchasing now and then seeing a lower price later in the season.

To alleviate this anxiety, retailers should heavily promote price guarantees. This involves matching lower prices at the retailer, as well as its rivals, that may arise later in the season. The good news for retailers is that a price guarantee provides psychological comfort to all buyers but still requires them to do some work (such as monitoring prices and then contacting the retailer) to collect on the pledge. Customers who take these actions are identifying themselves as people who care deeply about price. So if retailers have to pay out on the guarantee, they can take comfort in knowing these price-sensitive customers likely wouldn’t have purchased unless the guarantee was offered.

Employ Step Discounts

Using step discounts — such as 10% off for purchases over $500 and increased total discounts for reaching higher thresholds (e.g., 15% if over $750, 20% if over $1,000, and so on) — nudges customers to spend a larger slice of their budget at one retailer. Customers may purchase more to reach a higher level of overall discounts (“If I spend an extra $100, I’ll get an additional 5% off all of my purchases”). Just as important, the higher discount may induce to customers to buy additional products (“With the big-volume discount, it makes sense to buy it right now”).

Incentivize Big-Ticket-Item Customers to Buy Now

Another tactic to solve the “should I buy or should I wait” syndrome is to incentivize customers to make large purchases now. Consider providing an additional discount if customers waive their right to return a product or seek a price adjustment. This option acknowledges that prices may be lowered in the future. However, customers can avoid the hassle of constantly checking prices and earn an extra discount by taking the risk of buying today. This policy is akin to the nonrefundable price options offered by airlines — the lowest price comes with restrictions.

Offer Flash Sales

Flash sales target the most-price-sensitive customers. Only those who truly care about price are willing to constantly monitor their emails (or a retailer’s website) and instantly purchase within a brief time period. Instead of heaping on an extra discount (e.g., 20% off everything for the next two hours), flash deals should focus on specific popular products. Across-the-board discounts condition customers to expect a similar “available on all products” deal in the future. In contrast, product-specific deals create an urgency to buy (“I don’t know if this exact product deal will be offered in the future”).

The evidence we’ve seen so far indicates that consumers have the luxury to spend this holiday season. Instead of engaging in price-to-price combat, use a little finesse to boost sales by better meeting customers’ needs, incentivizing larger purchases, and more precisely targeting customers who require discounts to click “buy.”

Rafi Mohammed is the founder of Culture of Profit, a consultancy that helps companies develop and improve their pricing strategies, and the author of The Art of Pricing: How to Find the Hidden Profits to Grow Your Business (Crown Business, 2005) and The 1% Windfall: How Successful Companies Use Price to Profit and Grow (HarperBusiness, 2010). Follow him on Twitter @cultureofprofit